Pan African Resources
12 November 2018 By PDSNET
However, sometimes there is a commodity producer which is not exposed so much to those risks and whose operation is reasonably predictable. Pan African Resources (PAN) is such a producer.
PAN is a London- and JSE-listed re-treatment gold producer. What makes it particularly interesting is that it has now shifted its operation from underground mining at the recently closed Evander mine to surface operations which are obviously much cheaper and less risky. With its Elikhulu plant it will be able to produce about 700 000 ounces of gold a year at a cost of about R326 000 per kilogram against a current gold price of around R550 000. This means that over its life it will produce revenue of approximately R15bn of which R5,3bn will go back into the economy in the form of mine expenses creating a highly profitable entity with minimal risks.
It will also employ 350 people. In US dollars, the cost per ounce will be about $700 against a current price of just above $1200.This gives the company plenty of room should the gold price fall unexpectedly (which often happens). In our view, it is highly unlikely that the gold price will fall to anywhere near $700 – in fact, we believe that as the world economy moves into the current economic boom, inflationary pressures will inevitably build up and the demand for gold as the best inflation hedge will rise. The gold price is probably passed its cycle low and will probably remain above $1200.
In its financials for the year to 30th June 2018, the company took a R1,78bn impairment on the closure of Evander which put it into its first loss for 11 years - but this result was fully discounted into the share price and known. PAN also had very good results from its drilling exploration of the Royal Sheba mine in Mpumalanga. This could be developed into a fully mechanised open-cast mine with a grade of 3,8 grams per ton creating 500 jobs. The area appears to have considerable potential for gold mining, but there are often bureaucratic difficulties with establishing a new mine in South Africa.
The September quarter 2018 update shows that 37729 ounces of gold were produced in the quarter and the Elikulu mine is commissioned and operating. The Barbeton mine is ramping up to 100 000 ounces per annum and at the decommissioned Evander mine the company is taking out the pillars and remaining high-grade ore. Technically, the share has fallen from a high of 444c in July 2016 to current levels around 153c, but it now looks like very good value with low risk. Consider the chart:
